WSJ: WHAT WOULD IT TAKE FOR YOU TO START MOVING YOUR FORECASTS UP FOR THIS YEAR?

WILLIAMS: Investment spending is an interesting question. One of the things that still is surprisingly weak is business investment spending. Normally our macro models tell us that business investment tracks the economy pretty well. Yet right now business investment spending still seems pretty weak. I could see some upside surprises occurring. I’m not predicting them obviously. But a potential development would be seeing more business investment or a faster return on housing construction. I think the risks to our forecast are pretty balanced. I could easily think of scenarios where growth picked up to be well above 3%, as well as downside surprises.
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WSJ: DO YOU WORRY ABOUT THE RISK OF REPEATING WHAT MIGHT OR MIGHT NOT HAVE BEEN A MISTAKE IN 2004 AND 2005, OF KEEPING RATES TOO LOW FOR TOO LONG? IF WE DON’T KNOW THE ANSWER TO WHAT CAUSES BUBBLES, HOW DOES IT AFFECT YOUR THINKING AS A POLICY MAKER NOW?

WILLIAMS: It is something that keeps me up at night and probably others too. Think about the asymmetry of risks. For the last few years I think we’ve been correctly focused on tail risks to the downside, like deflation or the economy getting stuck in a low growth or stagnating situation. My view now is there are some potential risks to the upside, growth picking up much faster than we expect. We have a lot of accommodation in place. We should always keep that in mind. The funds rate is zero. We have a balance sheet of trillions and trillions in dollars. That’s all in place. Whether we cut purchases by 10 billion a month or not, we still have a very accommodative stance of policy and that is going to stay with us for quite some time. That is where I worry. If the economy really picks up or inflation or risks to financial stability really do start to emerge in a serious way, we need to be able to move policy back to normal, or adjust policy appropriately, in a timely manner. It’s always a difficult issue. This time it is just a much greater risk because we’re in a much more accommodative stance of policy.

Friday:
• At 8:30 AM ET, the Employment Report for December. The consensus is for an increase of 200,000 non-farm payroll jobs in December, down from the 203,000 non-farm payroll jobs added in November. The consensus is for the unemployment rate to be unchanged at 7.0% in December.

• At 10:00 AM, the Monthly Wholesale Trade: Sales and Inventories for November. The consensus is for a 0.5% increase in inventories.